The dollar managed to recover somewhat yesterday and while the USD index was still down on the day, it did recover from lows and overnight/this morning has rebounded over.5%. Much of the USD advance was assisted by euro weakness. We’ve been warning on this constant march higher for the single currency that the ECB would be likely to pass comment, or certainly push back somewhat against the markets extremely hawkish view around ECB policy. We saw that several times yesterday, the first was a release from ECB “sources” stating that the ECB would be unlikely to drop the pledge to keep buying bonds until inflation heads towards target in next week’s sit down. As we’ve pointed out, the reaction to last week’s minutes was very hawkish, some slight change in language got the market expecting a change in tact from the ECB, however they were always very unlikely to shift their stance just a month into their new program. While the ECB’s Villeroy warned that the euro’s recent appreciation is a source of uncertainly and could dampen inflation.
In the UK, inflation was slightly lower than expected in the core reading but still well above target and real wages in the UK still remain negative so the pound’s reaction was quite limited. Broadly speaking, risk appetite found itself leaning to the downside. By the end of the day yesterday sentiment was under pressure as fears of a US government shutdown towards the end of the week not helping matters but major US indices were all lower, and that tone continued overnight as the Nikkei and S&P/ASK both trading lower, while European stocks have also opened weaker this morning.
We don’t have too much data to get our teeth into today. Eurozone CPI data will be released mid-morning, and a slight rise of .4% from .1% is expected through December but the headline figure is due to show a slight decline year on year to 1.4% from 1.5%. This may well weigh on inflation expectations going forward and given Villeroy’s comments yesterday a weaker reading cannot be over looked. This will almost certainly see euro selling as it makes ECB concerns a reality.
Elsewhere, Angela Merkel is having issues forming a coalition and as such the euro is exposed to some volatility around related headlines. The euro has already been under some selling today and EURUSD is now down over 1% from Monday’s highs. Support comes in just below 1.2200 and for now is holding, a break below there could favour a larger correction back towards resistance turned support at 1.2091. EURGBP has deviated very little in two months, .8930 resistance down towards .8860 has been the tight range. But outside that the major range is .9020 to .8730. Everything else within that range is really just chop.
Focus back stateside for the afternoon and some attention will be on the beige book release and industrial and manufacturing production data, the real volatility risk for the greenback will likely come from Fed commentary with both Evans and Mester set to speak on policy today, with Evans also discussing the economy while Mester will be commenting on monetary policy communication. The USD has not quite recovered from Monday’s sell off but should both speakers tow the Fed line and back raising rates three time this year then there is still upside for USD.